Smarter accounting

VAT on non-refundable deposits

14 September 2020, Advocates, Barristers, Companies, Creative Industries, General, Sole Traders

VAT is chargeable on all non-refundable deposits

HMRC requires you to charge VAT on non-refundable deposits.  So you must issue a VAT invoice for charges levied even if the customer does not use the goods or services.  This came into force with effect from 1 March 2019, cancelling HMRC’s previous interpretation which allowed some non-refundable deposits to be treated as VAT free compensation.

This change mainly affects the hospitality industry, e.g. for hotel room bookings.  However any business that retains forfeited deposits for unused services and uncollected goods may also fall within the  updated policy.

VAT on non-refundable deposits

HMRC’s previous approach to VAT on non-refundable deposits

HMRC previously allowed businesses to claw back VAT accounted for on deposits where the customer, in the end, did not use the service or collect the goods for which payment had been made.

That policy was largely based on the 2007 judgement of the Court of Justice of the European Union (CJEU) in Société thermale d’Eugénie-les-Bains, which ruled that deposits kept by a hotel for cancelled bookings had no direct connection with the supply of any service, so should be regarded as compensation for the loss suffered as a result of the cancellation.  This view changed with the  Air France-KLM (C‑250/14), and Hop!-Brit Air SAS (C‑289/14) case.

What changed?

In the 2018 Budget, HMRC announced that changes will be made to the VAT treatment of deposits, with details to follow before the end of the year. The VAT man published Revenue and Customs Brief 13 (2018), setting new policy.

HMRC has concluded that, when a customer makes or commits to make a payment, it is consideration for a supply and therefore subject to VAT.  HMRC says you can’t reclassify the payment to compensate the supplier for a loss once it is known the customer will not use the goods or services.  The new policy is therefore that VAT is due on all retained payments for unused services and uncollected goods.  VAT included in the initial charge must remain unless the payment is refunded.  Only fully refundable deposits paid as security are outside the scope of VAT.

What about deposits before March 2019?

Businesses that charged VAT on non-refundable deposits before 1st March 2019 have applied the law correctly.  They cannot make any adjustment to previous VAT periods to treat supplies in line with former policy, as no error was made.


You take a booking for a hotel room on 4 January 2019 for a one night stay on 17 March 2019.  The price is £100 plus £20 VAT.  Your  hotel takes payment at the time of booking.  The customer has no entitlement to a refund in the event of them cancelling or not using the room.  Your hotel must account for the VAT when the payment is first made.

  • If the customer cancelled the booking before 1 March 2019, the hotel may make an adjustment and treat the £20 VAT as outside the scope of VAT.
  • If the customer cancelled on or after 1 March 2019 or does not use the room, the hotel cannot adjust the £20 VAT as the new policy will apply.

What about VAT on cancellation fees?

See the separate article which explains the VAT on termination fees.

Website by Haiwyre